The Truth about Fannie Mae and Freddie Mac

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Tell Me Sweet Little Lies

The Obama Administration’s 2017 Budget states in a section titled “Leveling the Playing Field through Wall Street Reform” page 42:

To finish addressing the weaknesses exposed by the financial crisis, the Government must reform the housing finance system and move forward to wind down the Government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, which have been in conservatorship since September 2008. As part of the 2016 Omnibus, the Congress included a provision that limits the ability to return to the dysfunctional system in effect prior to conservatorship, and reinforces the need to enact comprehensive reform. A bipartisan bill developed in the Senate in the previous session includes many of the Administration’s key housing finance reform principles, including ensuring that private capital is at the center of the housing finance system, and that the new system supports affordable housing through programs such as the Housing Trust and Capital Magnet Funds. The President stands ready to work with Members of Congress in both parties to enact commonsense housing finance legislation that embodies these core principles. (For additional discussion of the GSEs, see the Credit and Insurance chapter in the Analytical Perspectives volume of the Budget.)

This passage makes clear two points, a) the Administration is either confused or disingenuous regarding Fannie and Freddie’s role in the financial crisis and, b) FHFA is not fulfilling its mandate as an independent conservator.

HERA provides that as conservator FHFA may take any action that is necessary to put Fannie Mae and Freddie Mac in a sound and solvent condition and to preserve and conserve the assets of each firm. As conservator, FHFA has assumed by operation of law the powers of the Board and shareholders at Fannie Mae and Freddie Mac. FHFA has appointed Directors and CEOs who are responsible for the day-to-day operations of the two firms.

Classic bureaucratic doublespeak…

In the Budget, the Administration discusses winding down the “dysfunctional system” where later in the Analytical Perspectives it boasts of returning Fan and Fred to a “sound and solvent condition” and to “preserve and conserve assets.”

That’s like filling a bathtub with the drain open… a fool’s errand.

Or the Administration is not both simultaneously “winding down” and “building up.” Rather, it’s doublespeak to purposely confuse people – hopefully not all Federal Judges will buy this malarkey (lambaste of Lamberth…).

More bizarre is the assertion that FHFA has the full power of the Boards, but then states the Boards are responsible for operating the companies. How can a Board that lacks any power operate a company?

Now that’s dysfunction! Any time you find one party with authority and a different party with responsibility it usually leads to accountability and competency issues.

The Administration in the Perspectives does state that the “GSEs remain private companies” (p. 124).

More compelling is the admission on page 311 that the 3rd Amendments to the PSPAs where not to prevent circular draws but rather a misuse of power to advance policy:

To accelerate the wind-down of the GSEs’ retained mortgage portfolios, Treasury revised the PSPA terms in August 2012, setting the effective portfolio limitation at $1.1 trillion as of December 31, 2013, and accelerating the reduction in this limitation to 15 percent each year until December 31, 2018, when the combined limitation will be fixed at $500 billion ($250 billion for each company).

OK, so authority to operate Fannie and Freddie is shared three ways — with the Boards, FHFA and Treasury!? Can you say Clusterficken (used the German pronunciation to keep it G-rated… sorry to my German speaking friends!)?

Over time, it becomes more apparent that the Administration has had a secret agenda evidenced in doublespeak and abuse of executive privilege by hiding 11,000+ government documents in the court cases.

It is also clear that Congress will not enact any reform that will affect Fan and Fred’s ongoing concern/ownership status under this Presidency, while this Administration pulls all stall tactics in the court cases so they can kick the “can”servatorship down the road to the next Administration.